Regulation without transparency. A cost study of natural gas distribution for Mexico City

Abstract

There are a number of natural gas distribution permits to various cities in Mexico in which the criteria for setting rates by the regulatory body (CRE) are not replicable due to incomplete information. This lack of transparency breaches regulatory principles and can set up a situation of regulator capture. This encourages the opening of a field of academic analysis on the practice of natural gas regulation in Mexico, which has been alien to traditional research on energy policy. The case of the 2015 gas distribution tariffs to Mexico City is studied, under the question of whether the lack of information hides cross subsidies and capture of the regulator. The hypothesis is that through a methodology based on regulatory accounting it is possible to reconstruct the allocation of costs calculated by the regulator, despite the absence of information on the original calculation. This hypothesis is verified and reveals the existence of cross subsidies against domestic users who pay 70% of the costs but receive only 15% of the energy. The consequences of this finding are 1) it is possible to generate a robust regulatory accounting methodology to be applied to the set of existing cases and 2) the intervention of academia can help expose and improve regulatory practice to avoid regulator capture, which would be significant in the context of paradigm shifts in energy policy in Mexico.